A manager of Paris manufacturing which produces computer hard drives, is planning to lease a new automated inspection system. The manager believes the new system will be more accurate than the current manual inspection process. The firm has had problems with hard drive defects in the past and the automated system should help catch these defects before the drives are shipped to the final assembly manufacturer. Below are the relevant information:
Current manual inspection system:
Annual fixed cost = $35,000
Inspection variable cost per unit = $15 per unit.
New automated inspection system:
Annual fixed cost = $165,000
Inspection variable cost per unit = $0.55 per unit
Suppose annual demand is 8000 units. Should the firm lease the new inspection system?